Saturday, 28 April 2012

Burgernomics—the Mighty McDonald’s BIG MAC

So we all know about the Big Mac Index, which is based on the theory of purchasing-power parity and states that exchange rates should adjust until equilibrium—the market exchange rates that would equalize the price of an American Big Mac with an English Big Mac and a Chinese Big Mac.

Recently, another bright economist has come up with an intelligent way of comparing real wages across the world using McDonald’s Big Mac as well. Orley C. Ashenfelter of Princeton University calculates real wages as how much of a Big Mac could an hour of work can buy. He then flips the ratio over and compares the number of minutes a McDonald’s employee must work in order to earn enough to buy a Big Mac across countries.

In his paper published by the National Bureau of Economic Research, Ashenfelter concludes that after his own preliminary analysis of the decade long project, “Wage rates of workers using the same skills and doing the same jobs differ by as much as 10 to 1, and that these gaps declined over the period 2000 – 2007, but with much less progress since the Great Recession.”

As we might expect, workers in less developed countries would have to work longer in order to earn a Big Mac. For example, in 2011, a Chinese worker in McDonald’s would have to work 85 minutes to afford a Big Mac, while an American worker only needs to spend 27 minutes.

This measure has two major strengths. The first one is, of course, the creativity underlying this measure. We do not always need hundreds of simultaneous equations to solve an economic question. By properly constructing measures that change over time, we can always use innovative and interesting methods to test the effects of public policies or economic shocks around the world. Moreover, a lot of the past and current measurements only allow comparisons of wage rates within the same country, and today much emphasis has shifted to constructing measurements that would also permit cross country comparisons. This MacWage measurement appears to solve the problem in a nice and intelligent way.

Think Big and Be Innovative!

(P.S. If you are wondering what Maharaja Mac is, it is THE Big Mac in India!)